TCS missed street expectations in terms of profitability and margins in Q4 amidst a worsening macroeconomic environment.- The IT major flagged pain in the US market, noting that the banking sector crisis has impacted and, in some cases, even halted discretionary spends of clients.
- While acknowledging that this pain could continue in the short-term, the company refused to give guidance citing uncertainty.
- However, it maintained optimism over the medium and long-term citing a healthy orderbook.
The company on Wednesday reported its slowest constant currency revenue growth in 11 quarters, and refused to give guidance due to economic uncertainties. The outgoing chief executive officer (CEO) Rajesh
“Last quarter, we expected North America to recover through the start of the year meaningfully. This recovery has obviously not materialised and turned out to be more negative than we had expected,” Gopinathan said.
In a post-earnings conference call with analysts, Gopinathan was cautious and pointed out that the near-term visibility remained limited due to rising economic uncertainties. Despite this, the company remained confident in its competencies in the medium and long term.
“Customer sentiment across the BFSI (banking, financial services and insurance), retail and technology services verticals, particularly in Europe and US, was one of caution,” said Gopinathan. The BFSI vertical is the biggest for TCS by far – it contributed to over half of the company’s total net profit in FY23.
TCS missed street estimates in terms of profit, which came in at ₹11,392 crore for the March quarter, lower than the expected ₹11,550 crore. Its operating margin was also sequentially flat at 24.5% in Q4, while analysts had estimated a 40-70 basis point improvement.
Reacting to the company’s results, TCS’ shares were down by nearly 2% in trade on Thursday. In 2023 so far, its shares are down 2.2%.
While TCS’ banking sector clients remained steadfast in their relationship with the company, the spillover of the banking crisis involving the collapse of five banks in the US and Europe in March was visible in other clients, who ended up cutting their discretionary spending, Gopinathan said.
“Clients deferred newer initiatives which were not critical. In some cases, [they] completely halted discretionary projects,” said Gopinathan.
Economic uncertainty has loomed large over the performance of Big Tech in the US too. Apple, the world’s largest publicly-traded company, fell short of earnings expectations in the December quarter due to lower iPhone sales and supply chain disruptions in China brought on by the country’s strict zero-Covid policy.
Google-parent Alphabet said its ad partners could cut back spends, while e-commerce giant Amazon forecast lower demand.
Overall, the tech-heavy Nasdaq is down by more than 12% in the last one year. Apple’s shares are down over 6% in this period, while Alphabet has lost nearly 20% of its value. Amazon has lost the most, with a decline of over 37%.
Gopinathan and TCS’ CEO-designate Krithi Krithivasan noted that there has been weakness across sectors in the US due to economic uncertainty and that this could continue in the short term. Krithivasan said, “we are comfortable in the medium to long-term.”
While TCS struck a note of caution, analysts maintained their optimism about the company’s prospects, noting that the spending cuts by clients could just be a knee-jerk reaction, especially in light of TCS’ strong demand pipeline.
“Discretionary spending cuts in Q4 were more of a knee-jerk reaction by clients in response to the risk of banking contagion rather than deterioration in demand environment,” said JM Financial, adding that growth could rebound once sentiments improve.
As far as the orderbook goes, Q4 was strong for TCS with a total contract value of $10 billion. The company maintained that the deal velocity and the pipeline were both strong and that clients were not cutting back on more critical projects like IT transformation and tech adoption.
Despite the worsening macros, analysts at Motilal Oswal also remained optimistic overall about TCS, stating that a slowdown was partially factored into their estimates. Krithivasan also underlined that the revenue cycle could speed up in FY24, due to an expected reduction in the share of mega deals, which usually come with a longer gestation period, and a parallel rise in smaller deals.
With the International Monetary Fund cutting the global economic growth outlook to 2.8% in 2023, it remains to be seen how long it will take for sentiments to improve. For now, TCS and its incoming CEO Krithivasan are banking on the company’s strong order book, but the company says it will “adjust according to client needs''.
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